Here is from a recent note from BofA Merill Lynch:

“One of the remarkable things in the last several years is how QE critics have “hijacked” the inflation debate. Every time the Fed announces a new QE program or inflation ticks up a bit, critics warn of a potential surge of inflation. Sure enough, the QE3 announcement in September caused a knee-jerk jump in inflation breakevens, warnings of surging commodity prices and eventual broad-based inflation. All of this has the Fed on the defensive: their directive talks about what they will do if inflation is too high, but is mute on what they will do if inflation is too low. Despite the dire warnings, we believe there is a greater risk of unwanted disinflation than of unwanted inflation. This, along with the fiscal shock, is a good reason to fade the bond market sell-off. 

Cooling core, halting headline 

After bumping up in 2011, almost every broad-based measure of inflation is falling. The only indicator that is not dropping increasingly below the Fed’s 2% target is the median CPI, which has held steady at just above 2% for the last two years. Perhaps most notable, the Fed’s favorite gauge of underlying inflation, the core PCE deflator, has risen at only a 0.7% annual rate over the last six months. 

While much of the drop is temporary, headline inflation has been even weaker. In the last three months, the headline CPI, PCE deflator and PPI have all been in negative territory. Over the last 12 months, all are rising at about 1.5%. So far, QE3’s inflationary bark is a lot worse than its bite. 

Fundamentally weak 

This is not a fluke: almost all of the underlying determinants of inflation point to weakness.” 

Source: BofA ML

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